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My Two Cents

The Cockroach Theory of Finance At Work

Chris Farrell Dec 13, 2007

Banks are ‘fessing up. Here’s Bank of America chief executive officer Ken Lewis: “A number of participants–including Bank of America–have forecast sizeable writedowns, particularly in Collateralised Debt Obligations (CDOs). Based on conditions today, we expect those writedowns to be larger than have already been reported–although obviously we won’t know our final numbers until we close the fourth quarter.”

Remember last quarter when banks and Wall Street firms announced major write-offs, but tried to put a glossy spin on the news? They suggested that they had pursued the “kitchen sink” approach toward earnings–get all the bad news out at once.

But that wasn’t the case. Instead, a much better metaphor is the the cockroach theory of finance. There’s no such thing as one cockroach. And like cockroaches, bad financial news tends to scurry out over time.

Stay tuned.

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